We have heard, for many years, that the US has an “unfavorable” trade balance with certain countries, including Japan and China, and that this is a very bad thing. This balance refers to the ratio of imports we bring in, to exports we ship out, calculated for a given trading partner.
Consider Japanese cars, and forget for a moment, that some of these are now manufactured in the US. When you purchase a Japanese car, you will pay in dollars, but the manufacturer, say, Toyota, needs to pay its employees in yen. So, these dollars spent in our country, are converted, by a Central Bank, to yen in Japan.
There is a conversion rate for dollars to yen, that changes constantly, and it is based, at least in part, on whether, in the opinion of the Central Bank (and speculators) there are too many dollars relative to yen. If it is judged that there are too many dollars, then the dollar is perceived as “weak” against the yen, and it will take more dollars to exchange the same number of yen. This, of course, is simple supply and demand.
If this trend keeps up, then American cars will seem like more of a bargain, or at any rate, the Toyotas will price themselves out of the market for some American consumers. That will boost the sales of American cars. What a terrible consequence of this unfavorable balance of trade!
Naturally, as the dollar becomes strong against the yen again at some point, the Toyota will become affordable, and the consumer wins again!
Governments, in their infinite wisdom, will sometimes attempt to protect domestic industries by applying quotas and tariffs to certain imported goods. In practice, these measures almost never have the desired effect. A striking example of failure occurs with THE most taxed and restricted import of all–illegal drugs.
During the Reagan administration, import restrictions were placed on certain Japanese cars, ostensibly to protect American manufacturers. Since the tariffs would artificially raise the price and cut the profits on their cars, the Japanese manufacturers reacted by coming out with an entire line of upscale cars, that not only were more expensive to begin with, they would now be competing in a market segment that was less affected by price increases.
Thus, the American government, in trying to help the domestic auto industry, forced them to compete with the Japanese in the luxury as well as the economy market. And, we see that the results of this “unfavorable” balance of trade are lower priced and/or better quality cars. Shameful!
What if, owing to this perennial trade imbalance, Mr. Toyota has billions of dollars in the bank, and the exchange rate for yen is so bad, that he simply hoards them. With fewer dollars in circulation, the rate gets more favorable, and the dollar becomes strong again.
But, what if this doesn’t happen fast enough for Mr. Toyota? He has no choice but to spend the dollars in the US, or put them in a US bank. That’s a problem? Either domestic sales increase, or a local bank can loan more money to domestic businesses.
If Mr. Toyota doesn’t want the dollars to just sit in a bank, he can invest in the US. Heck, he can even build a plant in the US to employ 100% American workers! There doesn’t seem to be any consequence of this unfavorable balance that isn’t good for America.
At this point, the truly moronic unfavorable balance of trade folks will argue that Mr. Toyota, holding all these dollars, could cause a “run” on our Treasury. How, pray tell? I suppose, way back when, he could have produced his silver certificates and demanded the metal, but in case you haven’t noticed, those days are long gone. The US Treasury issues fiat money. There is nothing backing it, other than the stability of the US Government itself.
Finally, there is the matter of domestic industries that might fail under foreign competition. First of all, industries disappear all the time. Nobody uses slide rules or mechanical calculators, buggy whips, or 8-track music cartridges anymore. Should the government have stepped in to save these industries?
Would American consumers be better off buying higher priced goods just to support this or that failing industry? No doubt, there are individual hardships involved, but people get re-trained, and other industries develop. Unless you have a totalitarian dictatorship, you will never be able to force people to buy something they don’t want to buy.
So, you tell me what’s wrong with an “unfavorable” trade balance. And, while you’re at it, tell me what’s right about a favorable one. That’s what the Japanese have, and their economy is in tough shape at the moment.
The fact is: Notwithstanding legitimate national security issues, trade is good…period.